Who has gained from the inequality boom? — Crooked Timber

A question that comes up at CT quite a bit is: who has benefited from the massive increase in US income inequality over recent decades. I finally got around to chasing down Congressional Budget Office data (derived from tax records for the period 1979 to 2005), and the answer, in short is:

The top 1 per cent roughly doubled their share of both pre-tax income (9 per cent to 18 percent) and after-tax income (7.5 per cent to 15 per cent)

The rest of the top 10 per cent slightly increased their share (from about 20 to about 22 per cent)

The next 10 per cent held their share (about 15 percent)

The remaining 80 per cent of households saw their share drop (from 58 per cent to 48 per cent of post-tax income, with the biggest drops coming at the bottom. The bottom 40 per cent of households now get a smaller share of post tax income (14 per cent, down from 19) than the top 1 per cent. A couple of observations on this.

First, to answer the question “who gained from the inequality boom” we need a counterfactual. If, as is commonly claimed, pro-rich policies raised the average rate of growth of income, people in the top 20 per cent of the income distribution were better off, since they had a constant share of a bigger cake. The effects are ambiguous for everyone else, and, on any plausible numbers, everyone below the median is worse off than they would have been with moderately slower, but equitably distributed growth. On the other hand, if pro-rich policies contributed to the slowdown in economic growth for the period since the 1970s, compared to the postwar boom, then the only net beneficiaries are those in the top 1 per cent of the income distribution.

Second, the picture would probably change a bit if benefits (particularly employment-related health benefits) were taken into account. My guess is that this would probably improve the outcome for the top quintile (since this group mostly held on to benefits which increased faster than wages) and worsen it for those below the median (who have lost access to benefits over time).

Finally, it’s striking that, on the CBO figures, the tax system is almost exactly proportional: that is, it has no net redistributive effect at all. The top 1 per cent have a somewhat smaller share of post-tax income than of (measured) pre-tax income, but that almost certainly reflects their capacity to hide income from the tax system.

JQ – in Australia since the 1950s the tax redistribution burden has fallen from being primarily on the top decile to also being on the second top and the third top deciles of individual taxpayers. Tax policies must have been pro rich if the top decile have been able to divest the burden of redistribution to lower ranking deciles. It would seem obvious at least in one aspect of tax policy (income tax) policies have been pro rich on average.

The recipients of that redistribution, contrary to what is commonly thought, have not been primarily those lower ranking deciles (as was more the case in the 1950s) but the middle and higher on average. Having looked at the Australian income tax burden from long run historical data – I found the top decile actually bear on average over forty years only 3.49% of the redistribution of tax burden as opposed to 5.47% in 1945. Effectively that means the top decile has reduced their contribution to tax redistribution by almost two percent and there is in fact also approx 2% less overall redistribution occurring than in 1944 / 1945.

I agree with JQ – the figures also do not represent the ability of the top one percent to hide income from tax so it is likely that there really has been little real redistribution going on. Operation Wickenby at least acknowledged this black hole in tax policy and such ability to hide income offshore really makes a mockery of the entire income tax system.

Also the major beneficiaries of redistribution on average are the 5th, 6th and 7th deciles (middle class welfare).

Australia’s pattern may not be a severe as the US but it has certainly followed the same trend, along with many other countries, for rising inequality which cant be good for our economic health. In saying this, I expect someone to now tell me that “there is nothing wrong with rising inequality…. its good for economic health and makes for more innovation and doesnt affect growth.”

That may have been the case in the middle of the speculative bubble but it was an illusion.
In comparison to financial executives (the new elite amongst us) I doubt whether academics have even maintained their relative real incomes over forty or fifty years, let alone gained from rising inequality.

I expected to find this for the US, but the data doesn’t support that view. Academic households are mostly in the top two quintiles, but not in the top percentile, so it appears that US academics have either held steady or lost ground relative to mean income.

In Australia, academic salaries have declined quite a bit relative to senior public servants, and even more relative to the private sector, though there are some limited exceptions (for example, Federation Fellowships) and some countertrends (for example, professors used to get pay similar to judges, now they get a lot less, but it’s easier to become a professor than it used to be).

@jquiggin
Robert Gordon discusses similar issues in ‘Misperceptions About the Magnitude and Timing of Changes in American Income Inequality’, Robert J. Gordon, NBER Working Paper No. 15351, September 2009. He starts:

“The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequalityis often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993.”

In addition to Gordon’s paper, significant increases in life expectancy should be taken into account. Longevity gains count both in OECD and more so in developing countries.

When you say that ” Having looked at the Australian income tax burden from long run historical data – I found the top decile actually bear on average over forty years only 3.49% of the redistribution of tax burden as opposed to 5.47% in 1945.”, I’m afraid that I don’t understand what these percentage numbers are referring to.

It is also worth noting that the English-speaking countries all tend to have more progressive direct taxes than other OECD countries (and lower indirect taxes which are even less progressive), even after adjusting for the fact that higher income groups have higher shares of market income in English-speaking countries. In fact, the USA has the most progressive direct taxes in the OECD – but it has one of the lowest levels of spending on social security benefits and these are not particularly progressive.

I would argue that the challenge in the US is not to increase the progressivity of the tax system, but to maintain progressivity while increasing the total tax take in order to fund progressive social programs.

Sarcasm alert! To pre-empt an avalanche of pro trickle down posts, I decided to outline the spin argument in its minimalist form. It goes like this: Before something can trickle down you have to shuffle stuff up. The reason why income has not trickled down during the great moderation is because there weren’t enough tax cuts to shuffle income up. Debt cannot be shuffled up because there is no demand for debt up there. But, the system was very successful in having debt trickle down. Further deficit financed government expenditure would only be acceptable if the expenditure goes straight to the top – obviously because to do otherwise would prevent observing trickling down.

Those who object to the word ‘spin’ might be happy with the phrase ‘alternative viewpoint’.

@Peter Whiteford
Peter – the percentage points I refer to arise from the changes in decile shares as a consequence of tax concensions, exemptions and the effect of income tax istelf. That is the difference between actual, net, taxable and after tax income as defined by the ATO (I will not post the entire definitions as too long and Im sure you know them already).

As the tax legislation governing these classifications are administered by the ATO we expect to see some distributional impact of tax legislation through a change in the decile percentage share of aggregate reported Australian tax income forms between these categories (given that they occur at different points in time in the reduction to taxable income).

I refer only to decile share changes relating to that part of tax income forms. Its available information (Andrew Leigh) and relatively straightforward to calculate.
I understand there are also rebates and these need to be taken into account, however I restrict my comments only to that part of tax income forms. Rebates may assist the lower ranking deciles and doubtless you have probably covered this area. I will look at your paper. I also feel that notwithstanding, how JQ has summed it is probably close to the truth because of the ability of the very wealthy to hide income for tax purposes. At least one paper I have read implied that the behaviour of the top one percent had a significant impact on the outcome for the top decile. One disturbuing aspect in Australian data is that the top one percent is also be omitted from some annual data entirely (for privacy reasons – appraently not enough of them).

The Spirit Level makes a strong argument that, for developed countries at least, inequality is more important than income wrt quality of life measures such as no. of persons in prison, longevity, drug use and so forth. In their figures, Australia sits at about 4th on most unequal countries in terms of income distribution. The USA is typically worst on almost every measure you’d want to be best on. Is there a general critique of their work anywhere? Is there work generally held to be accurate?

@Rationalist
Then it’s just as well Prof. Quiggin can correct you. Aren’t we lucky that some people dedicate their lives to study, are willing to look at data and publish their findings for others to review and scrutinise, so a counter balance is provided to people who make unfounded assumptions based on nothing more than their ignorant prejudices.

I think that the relationship between health outcomes and inequality within countries is clear – that is low income groups tend to have worse health outcomes in terms of disability, sickness and longevity than high income groups. However causality works both ways – income inequality affects health and health influences disparities.

Cross nationally, the relationship is much less clear – for example, you quote figures that Australia is about the 4th most unequal country in terms of income distribution, but Australia has one of the highest life expectancies of any country. Japan has the highest but in fact Japan is not a very equal country and never was. Denmark is probably the most equal country in the OECD but its life expectancy is not as good as a lot of other countries.

some of these problems apparently relate to the inequality data used in the spirit level, which in some cases is the Luxembourg Income study (LIS) and in other cases is the UN-WIDER data base.

The Spirit level has produced a good deal of controversy – see http://spiritleveldelusion.blogspot.com/ for example. Some of these arguments come from “right-wing” perspectives and some are not ones I agree with. however, I think the basic problem is that the income inequality data is of variable quality and much depends on technical issues in measurement, concepts and surveys.

For example, the most recent OECD data show inequality in Australia is currently below the OECD average, so not the 4th most unequal country. Wilkinson et al didn’t use OECD data, but for Japan used the UN data – which I think is very low quality. For example, the surveys of Japan used by Wilkinson – and a lot of other people – used to exclude all single person households and the self-employed, artificially lowering measured inequality. The position of Japan is very important because they have very good health outcomes and if they are viewed as a low inequality society they produce a lot of the cross-country gradient.

• the working rich have replaced the rentiers at the top of the income distribution in the English speaking countries;

• Long-term mobility among all workers has increased since the 1950s but has slightly declined among men.

• The decrease in the gender earnings gap and the resulting substantial increase in upward mobility over a lifetime for women are the driving force behind the increase in long-term mobility among all workers

• Those gains of women have been so great that they have substantially reduced long-term inequality in recent decades among all workers, and actually almost exactly compensate for the increase in inequality for males.

Peter Whiteford, according to David Cay Johnston, the top 400 average income in the US tripled during the Clinton Administration and doubled during the first seven years of the Bush Administration. And by 2007 the top 400 averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier. There is no equality in the USA just a lot of inequality.

The CIA factbook (which is the source of the data in the map that I linked to) puts Australia’s GINI coefficient at 30.5, and the EU as a whole at 31. If the EU, the U.S. (45), Canada (32.2) and N.Z. (36.2) are all more unequal than Australia, I’d say that the statistic isn’t true for the “developed world” either.

Peter Whiteford, I should have further stressed that ‘the effective tax rate on high incomes fell by 7% during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that the highest income earners (over $372,650) supposedly pay’.

@gregh
In OECD (2008), Growing Unequal? : Income Distribution and Poverty in OECD Countries, the one pager on Australia says:

• Income inequality in Australia has fallen quite sharply since 2000. It is now below the OECD average for the first time.

• Australia is one of the most socially mobile countries in the OECD. What your parents earned when you were a child has very little effect on your own earnings.

• The decrease in income inequality would have been even more dramatic if there had not been changes in social structures (smaller households, more single parent families) and ageing of the population, both of which tend to increase inequality.

• Because absolute incomes have increased rapidly, many poor people in 2005 do have more income than their counterparts in 1995 — poverty based on a constant income threshold in 1995 AUS$ decreased by half.

Whilst the OECD, CIA, etc are useful sources for comparisons between countries, when looking just at Australia it’s better to rely on the ABS:

The 0.319 measure for 2007-08 is up 5.6% on the 1994-95 measure of 0.302. While other methodological changes introduced with the 2003-04 and 2005-06 survey results have contributed to this difference, the residual movement (after methodological changes) in this summary indicator is very likely to be statistically significant. Some other indicators of income distribution show a similar pattern. As the table below shows, the income share going to first four income quintiles fell, while the share for the fifth quintile rose.

your link notes that “gaining access to income and retaining that access is now significantly more difficult than it was in the 1960s when we had true full employment.”

That is a boy’s view of world.

Women remember the 1960s very differently in terms of labour force participation, wage levels, equal wages, job quality, marriage bars to promotion, and career paths. did women still have to quit their public service jobs when they married in the 1960s??!

The 1960s were not the good old days if you were a woman.

Today are the good old days for women. they can even raise children on their own and still, in many cases, pursue careers.

Too many on the Left are grumpy old men who have no excuse for forgetting the rapid economic emancipation of women in the mid and late 20th century. They lived those decades!

your link at #29 notes that “gaining access to income and retaining that access is now significantly more difficult than it was in the 1960s when we had true full employment.”

That is a boy’s view of world.

Women remember the 1960s very differently in terms of labour force participation, wage levels, equal wages, job quality, marriage bars to promotion, and career paths. did women still have to quit their public service jobs when they married in the 1960s??!

The 1960s were not the good old days if you were a woman.

Today are the good old days for women. they can even raise children on their own and still, in many cases, pursue careers.

Too many on the Left are grumpy old men who have no excuse for forgetting the rapid economic emancipation of women in the mid and late 20th century. They lived those decades!

Psychological projection or projection bias (including Freudian Projection) is the unconscious act of denial of a person’s own attributes, thoughts, and emotions, which are then ascribed to the outside world, such as to the weather, a tool, or to other people. Thus, it involves imagining or projecting that others have those feelings.

I think this is one where arguing as if money were the sole or even the main determinant of equality for most people is to pursue a dead end. JQ notes -and it is not contested – that pretty much all the monetary growth in the US economy of the last 20 years has gone to the very rich. Wilkinson et al take off from well-established work that inequality leads to worse health and other outcomes to argue for a more equal distribution of money income. But the purely financial data do not support their argument very well.

Surely for most people equality is having a secure social standing – one that limits the control others can exert over one’s life. This can be based on having a trade, having tenure, being in a union, having sufficient standing to be able to push back against harassment and so on – a whole complex of social arrangements.

Being at the mercy of the Centrelink bureaucrat is just as bad as being at the mercy of the boss (or, taking Jim Rose’s point, being at the mercy of one’s husband). Money does not necessarily mitigate the condition – it depends on how it is derived, and what it is spent on, and what rights society claims over its use.

For what it’s worth, my feeling is that Australia is significantly less equal than it used to be, but this is not so much about money as about a whole lot of other things.

@SJ
I am not surprised that the Left of the web is a boy’s own club were gender analysis is not understood, much less used. even basic questions such was are the statistics for men and for women pass you by.

Peter T at #39,
I have pointed to other viewpoints on the conflicting trends in equality for men and women at #4 and #17.

SJ – The Gini co-efficient is a strange animal – its only one measure of inequality and it is just plain blind to certain inequalities – like the wool boom in 1950 in Australia rewarded the top decile extraordinarly (wealthy graziers and wool exporters) – the Gini co-efficient rose.

Inequality rose – yet perhaps this was a case for trickle down that actually was real, not imaginary!

On the other hand the severe inflation in the early 1970s couldnt have been said to have rewarded the lowest deciles (not when prices were rising and despite rising wages they were moving up tax brackets as well)

yet the Gini falls (greater equality – I dont think so really)…The Gini is a little unpredictable and a little blunt as a measure.

Having just had an interesting conversation last Saturday with a 26 year old female temp working for Deloittes on contract. She tells me there are a lot of female managers…who all have young children..and bemoan the fact they cant afford to be at home with their children “where they want to be”.,… (oh the mortage pain).

As a boomer child myself…I grew up in a street where all the Mums were at home and you would have to run from house to house to find out where your Mum was having afternoon tea with her friends when you got home from school…as a child it was great. An extended network of Mums and kids.

I told her to tell those women…it wasnt as easy as they imagine…imagine having to go cap in hand to the man of the house to ask for a little extra. Imagine arguments over whether the woman should have a car!! (I lived them!) Imagine seeing the man wearing cashmere cardigans to work whilst your Mum sewed your clothes from materials she bought cheaply at Fox’s bargain fabric stores…

Life, for women, isnt easy no matter whether they work or they dont… but its a shame the burden of paying for a house ends up keeping a woman away from her children if thats where she wants to be.

the problem is explored by daniel Hamermesh in “Stressed Out on Four Continents: Time Crunch or Yuppie Kvetch?”

the source of problem is the more money people have, the more pressed for time they’ll be as they try to find ways to spend it all.

There are really only a couple of hours in the average weekday in which a person has some flexible time.

With more money comes more options, which leads to greater stress in trying to get everything done.

you can’t pay a person to sleep for you, go to movies, read, exercise, eat or any of the countless other things that occupy the day. Those things take time, and time is an incresingly scarce commodity because it is more valuable.

Poverty is a problem. Time scarcity is not a problem in the same class.

@Jim Rose
Its not a choice for many JR (even if women romanticise the past when most Mums were at home – it wasnt all apple pie then – although I didn get a lot more home made cakes as a kid than Ive ever seen since alas) when it only took one wage to pay a mortgage.

Its about real income (not monetary income). Its not about “yuppie Kvetch”. Its about time crunch and poverty if the alternative is chosen (stay home with the kids). Its also about nostalgia. Modern women may think about the “good old days” when women could stay home and raise kids….but they cant really imagine the underside of being trapped, poor, miserable, making do, having to ask for money etc.

I honestly dont know what Id prefer…except to be rich enough not to have to ask for money and to have time enough to be able to raise my own kids at home. Thats the perfect world.